Compensation Management: An

Introduction

Compensation is any form of payment given to the

employees in exchange for the work they perform.
Financial payment made at or near place where
work is performed is called “Direct Compensation”
(Eg: Wages, Salaries, Overtime Pay,
Commissions/Incentives & Bonuses).
 
 Objectives of Compensation Planning
a)     Fairness or Equity: The most important objective of any pay system is fairness or
equity. Equity has three dimensions, namely:
       Internal Equity: It ensures that more difficult jobs are paid more
       External Equity: It ensures that jobs are fairly compensated in comparison to
similar jobs in the labor market.
       Individual Equity: It ensures equal pay for equal work that is, each individual’s pay
is fair in comparison to others doing the same or similar jobs.
b)    Attract Talents: Compensation needs to be high enough to attract talented people.
Since many firms compete to hire the services of competent people, the salaries
offered must be high enough to motivate them & attract towards an organization.
c)     Retain Talents: If compensation levels fall below the expectations of the employees
or are not competitive, employees may quit the organization in frustration.
d)    New and desired behavior: Pay should reward loyalty, commitment, experience,
risk taking, initiatives and other desired behaviors.
e)     Control costs: The cost of hiring people should not be too high. Effective
compensation management ensures that workers are neither overpaid nor underpaid.
f)      Comply with legal rules: Compensation programs must invariably satisfy
Government rules & regulations regarding minimum wages, bonus, allowances,
benefits etc.
g)     Ease of Operation: The compensation management system should be easy to
understand & operate.
 Compensation Policy
A compensation policy should aim:

   To recognize the value of al, jobs in relation to each other within the
organization.
  To take account of wage rates paid by companies of similar size,
product & philosophy.
   To ensure stable earnings
   To enable individuals to reach their full earning potential as far as
reasonably practicable.
   To ensure employees’ share in the company’s prosperity as a result of
increasing efficiency.
 Factors Influencing the Employee
Remuneration System
External Factors
1. Labor Market:
       Demand for & supply of labor influence
wage & salary fixation. A low wage rate may be
fixed when the supply of labor exceeds the
demand for it. A higher wage will have to be paid
when the demand exceeds supply, as in case of
skilled labor.
       Going rate of Pay: Going rates are those
that are paid by different units of an industry in a
locality & by comparable units of the same
industry located elsewhere.
       Productivity: Productivity levels of labor also
influence wage fixation. It can arise due to
increased effort of the worker, or as a result of
the factors beyond the control of the worker such
as improved technology, sophisticated machines
& equipment, better management & so on.
Internal factors
1. Business Strategy:
The overall strategy which an organization
pursues should determine the remuneration to its
employees. Where the strategy of the
organization is to achieve rapid growth,
remuneration should be higher than what the
competitors pay. Where the strategy is to
maintain & protect current earnings (due to
declining profitability of the organization),
remuneration level needs to be average or even
below average.
 Factors Influencing the Employee
Remuneration System
External Factors
2. Cost of Living:
This criterion matters during periods of rising
prices, and is forgotten when prices are stable or
falling. A rise in the cost of living is sought to be
compensated by the payment of dearness
allowances, where basic pay remains undisturbed.
3. Labor Unions:
The presence or the absence of labor
organizations often determine the quantum of
wages paid to the employees.
Internal factors
2. Job Evaluation and Performance Appraisal:
       Job evaluation helps to establish satisfactory
wage differentials among jobs.
 
       Performance Appraisals help award pay
increases to employees who exhibit improved
performance.
3. The Employee:
Several employee-related factors interact to
determine his or her remuneration. These include
performance, seniority, experience, potential
etc.
 Factors Influencing the Employee
Remuneration System
4.Labor Laws:  
       Payment of Wages Act 1936
       Minimum Wages Act, 1948
       Payment of Bonus Act, 1965
       Equal Remuneration Act 1976
      

5. Society:  

6. The Economy:  
 Components of Remuneration
Wages/Salary
Wages represent hourly rates of pay, and salary refers to the monthly rate of
pay, irrespective of the number of hours put in by an employee. Wages and
salaries are subject to annual increments. The wage Structure in India can be
broadly examined under the following heads:
(a)   Basic Wage: The basic wage in India corresponds with what has been
recommended by the Fair Wages Committee (1948) & the 15 th Indian Labor
Conference (1957). While deciding the Basic wage, the following criteria may
be considered, namely: (i) Skills need of the Job (ii) Experience needed (iii)
Difficulty of work-mental as well as physical (iv) Training needed (v)
Responsibilities involved (vi)Hazardous nature of the Job.
(b)  Dearness Allowances (DA): It is the allowance paid to the employees in order
to enable them to face the increasing dearness of essential commodities. It
serves as a cushion, a sort of insurance against the increase in price levels of
commodities. Instead of increasing wages every time-there is a rise in price
levels; DA is paid to neutralize the effects of inflation.
 Components of Remuneration

(a) House Rent Allowance (HRA): Housing is one of the most burning
issues in metropolitan cities. Rising prices of residential premises and
high rentals is a bane of big metropolitan cities. To attract and retain
talent, employers offer to meet part of the rental costs of the
employee in the form of house rent allowance (HRA).
Conveyance Allowance: It includes any allowance granted to meet
the cost of travel on tour or on transfer; ); any allowance, whether,
granted on tour or for the period of journey.

(b) Transport Allowance: It is the allowance granted for Commuting

between place of residence and the place of duty.
 Components of Remuneration
(c) Incentives:
Also known as “payments by results”, incentives are paid in addition to
wages & salaries. Incentives depend upon productivity, sales, profit, or cost
reduction efforts. There are (i) individual incentive schemes, & (ii) group
incentive programs.

(d) Fringe Benefits:

These include such employee benefits such as Provident Funds, Medical Care,
Hospitalization, accident Relief, health & group insurance, canteen, uniform,
recreation and the likes.

(e) Perquisites:
These are allowed to executives & include company car, club membership,
paid holidays, furnished house, Employee Stock Option schemes & the like.
Perquisites are offered so as to retain competent executives & talents in an
organization.

(f) Non-Monetary Benefits:

These include challenging job responsibilities, recognition of merit, growth
prospects, competent supervision, comfortable working conditions, job
sharing & flexi-time.
 Wage Policy In India: Minimum Wage,
Fair Wage & Living Wage

1. Minimum Wage:
2. Fair Wage
3. Living Wage
 Wage Concepts
• Minimum wage
– provides for sustenance of life but also for
preserving efficiency
• Fair wage
– comparable with standard wages elsewhere
• Living wage
– providing essentials plus certain comforts
Challenges of Remuneration
Skill-based
Pay
Monetary
vs. Non- Salary
Monetary Reviews
Rewards

Employee Pay
Participation
Remuneration Secrecy

Below Market
Egalitarianism
or Above
Vs Eliticism
Market Rates
Comparable
Worth
 Skill-based Pay and Job-based Pay
Compared
Factors Job-based Skill-based

Pay structure Based on job performance Based on ability to perform

Employee carries wage; Employee linked to

Employer’s focus Job carries wage; Employee linked to job
skills.

Employee focus Job promotion to earn greater pay Skill acquisition to earn greater pay.

Procedures required Asses Job Content ; Value Jobs Assess Skills ; Value Skills

Source: Raymond A. Stone, Human Resource Management, John Wiley & Sons, 1995, p.324.
 Challenges of Remuneration
• Skill-based Pay

• Salary Reviews

• Pay Secrecy

• Comparable Worth

• Employee Participation
Aswathappa
 Methods of Wage Payment Systems
1. Time Wage System:

• In this system, the worker is paid on the basis of the time spent on
the work irrespective of the amount of work done.

This is the oldest system

• (i) quality of work is more important than that of volume.

• (ii) measurement of work is not convenient
• (iii) production involves delay
• (iv) where the work requires a high degree of skill & dexterity &
• (v) where work is of such nature that efficiency can be measured
by close supervision.
 Methods of Wage Payment Systems

. Piece Rate System:

• Here the workers are paid at a stipulated rate per
piece or unit of output.
• In this system, the payment is fixed per piece of
work & the worker is paid according to the number
of pieces completed or the volume of work done by
him, irrespective of the time taken by him in
completing that work.
• Efficiency is thus recognized in this system.
• The method is applicable where (a) quality of work
is not important (b) work is of a repetitive nature,
(c) job rate can be fixed satisfactorily, (d) there is
sufficient demand for output to guarantee
continuous work & (e) the job is a standardized one
 Incentive Plans

Incentive plans envisage a basic rate usually on time basis applicable

to all employees & incentive rates payable to the more efficient
among them as extra compensation for their meritorious performance
in terms of time, cost & quality.

Features:

The characteristics of incentive plans are as follows:

       Minimum wages are guaranteed to all workers
       Incentives by way of bonus etc are offered to efficient workers for
the time saved

A standard time is fixed & the worker is expected to perform the

given work within standard time. The standard time is set after
making time studies for the performance of a specific job
 Common Incentive Plans
Profit Sharing & Stock Options Plan:

• Profit sharing is a scheme whereby employers undertake to pay a

particular portion of net profits to their employees on compliance
with certain service conditions & qualifications.
• The purpose of this profit sharing schemes had been mainly to
strengthen the loyalty of the employees to the organization by
offering them an annual bonus provided they are on the service rolls
of the firm for a definite period of time.
• The share of the profit can be given in cash or in the form of shares in
the company, which is known as Employees’ Stock Option Plan
(ESOP).
 Fringe Benefits
The term fringe benefit refers to the extra benefits provided to the
employees in addition to the normal compensation paid in the form of
wage or salary.
 
The main features of Fringe Benefits are as follows:
       They are supplementary forms of compensation
       They are paid to all employees based on their membership in the
organization.
       They are indirect compensation because they are usually extended
as a condition of employment & are not directly related to employee
performance
       They help to raise the living conditions of the employees
They may be statutory or voluntary. PF is a Statutory Fringe Benefit
whereas Transport is a voluntary Fringe Benefit
 Fringe Benefits

Need for Fringe Benefits:

Most organizations in India have been extending fringe benefits to

their employees due to the following reasons:

      To satisfy employee demands

      To satisfy Trade Union demands
       Employers prefer fringe benefits.
      Fringe benefits serves as the basis for providing social security
Fringe benefits help to improve human relations in organizations
 Fringe Benefits

Objectives of Fringe Benefits:

       To create & improve sound industrial relations
       To motivate employees by identifying & satisfying their unsatisfied
needs
       To provide security to employees against social risks like old age
benefits and maternity benefits
       To protect the health of the employees and to provide safety to
the employees against accidents
       To promote employee welfare
       To create a sense of belongingness among employees and to retain
them.
       To meet the requirements of various legislations relating to fringe
benefits.
 Types of Fringe Benefits
A. Payment for time not worked:
B. B. Employee Security: This includes benefits such as (a)
Retrenchment Compensation: The Industrial Disputes Act
1947, provides for the payment of compensation in case of
any lay-off & retrenchment. (b) Lay-off Compensation: In
case of lay-off, employees are entitled to lay off
compensation at the rate equal to 50% of the total of the
basic wage and dearness allowances for the period of their
lay off except for weekly holidays. Lay off compensations can
normally be paid upto 45 days in a year.
 
C. Safety and Health: To protect the employees against
accidents, unhealthy working conditions and to protect the
worker’s productive capacity.
 Types of Fringe Benefits

D. Workmen’s Compensation:
In addition of safety and health measures, provision for the payment
of compensation has also been under Workmen’s Compensation Act,
1923. The Act is intended to meet the contingency of invalidity &
death of a worker due to an employment injury or an occupational
disease specified under the act at the sole responsibility of the
employer.
 
E. Health Benefits: These include (i) Sickness Benefits, (ii) maternity
Benefits, (iii) Disablement Benefits (iv) Dependent’s Benefits (iv)
Medical benefits
 
F. Voluntary arrangements: These include providing health maintenance
services, emergency cares, on the job treatment care for minor
complaints, health counseling, medical supervision in rehabilitation,
accident & sickness prevention, health education programs, extension
of medical benefits to employee family members & retired
employees.
 Types of Fringe Benefits

G. Welfare & Recreational facilities: These include: (i) Canteens,

(ii) Consumer Stores/Societies, (iii) Credit Societies, (iv)
Housing Facilities like staff quarters, (v) Legal Help &
counseling, (vi) Employee counseling, (vii) Welfare
organizations & welfare officers, (viii) Holiday homes &
company guest houses, (ix) Educational Facilities for
employees & their children, (x) Transportation facilities, (xi)
Parties, picnics, social gatherings & celebrating festivals, (xii)
Miscellaneous activities like organizing sports, cultural
programs, setting up of clubs, community service activities,
Leave Travel Concessions (LTCs), performance awards etc.
 
H. Old Age & retirement Benefits: These include providing (i)
Employee Provident Funds (PFs), (ii) Pension Schemes, etc